The Year in Review: a closer look at 2015
Every January, it is customary to look back at the year that was. What were the highlights? What were the lowlights? What got us to where we are today?
Most importantly, “What did we learn?”
Recently, we looked at a list of some of the most important—or at least, most discussed—events that happened this past year. As we scanned the list, something jumped out at us. A lesson everyone knows, but that we sometimes fail to appreciate.
We all see the world differently—and how we see it says a lot about us.
Seems like an obvious thing to say, doesn’t it? However, hang onto that statement for a moment, because we are going to come back to it—and to the implications, it has on investing.
Two Boxers & a Dress
Come back with us to February 2015, when the picture of a dress went viral on social media. What was so important about it? Only the fact that no one could agree what color the dress was. Some said black and blue. Others, white and gold. All across the internet, the debate raged.
It seems like a trivial thing, and it was. Nevertheless, it also raises an important point. How can something as seemingly rigid as color be interpreted so differently by so many people? How can millions of people look at the exact same image and yet see different things?
A few months later, another trivial event dominated worldwide discussion. “Who ’ya got?” people asked. “Floyd or Manny?”
We are referring, of course, to May’s much-anticipated boxing match between Floyd Mayweather and Manny Pacquiao. Before the fight, millions of people failed to agree on who would win, who was the greater boxer, or even who deserved to win. Everyone who paid attention saw it differently. Some thought Mayweather’s ferocity and athleticism would be the deciding factor. Others believed Pacquiao’s experience and cunning would win the day. Some cheered for Mayweather, finding his brash self-confidence appealing. Others preferred Pacquiao’s quiet stoicism. Mayweather eventually took the title, but who won is less interesting to us than what people thought, and why. In this case, who people cheered for said more about them than about their favorite boxer.
Freedom & Security
Let’s move onto far more important matters. While the hubbub over dresses and boxers has died down, one argument still rages: how do we protect ourselves from those would do us harm while still ensuring basic rights and liberties for our fellow man and ourselves? This was the defining question of 2015.
Sadly, several recent events have made the debate necessary. From the Charlie Hebdo shootings in January to the Charleston shootings in June; from the ongoing Syrian Civil War and the refugee crisis, it has spawned, to the Paris terrorist attacks in November; the twin problems of violence and terrorism have divided opinion the world over.
For example, take the issue of gun control. Is it more important to limit the number of shooting deaths by making certain firearms harder to obtain, or is it better to uphold the 2nd amendment right to keep and bear arms without restriction? Furthermore, would gun control be effective in limiting violence, or would it actually promote it?
Or, consider the debate around religious freedom versus religious extremism. Some national figures have proposed monitoring Islamic mosques and creating new restrictions on Islamic refugees trying to enter the country. Others claim that religious tolerance and openness is more in keeping with our nation’s values, and that to act otherwise would violate the first amendment.
We all have our opinions on these issues. We have ours, and we are sure you do, too. The point is whatever we feel or however, we think, we all see things differently. Reasonable, intelligent people can disagree—sometimes strongly—on what’s right. Whatever your viewpoint, you could probably come up with statistics or historical antecedents to back up your position. However, in the end, our opinions probably say more about us than anything else.
This same phenomenon is true when it comes to analyzing the markets.
Market Volatility—at Home and Abroad
For those of us who pay attention to such things (including us), it has been a fascinating year in the markets. Here is a quick rundown of some of the financial happenings around the world:
China: For a long time, China’s stock market was on an incredible hot streak. With the state-owned media, urging them on, many people started pouring their money into stocks. The resulting growth was explosive but unsustainable. As the demand for stocks increased, so too did stock prices. That did not deter investors, who kept buying as long as stocks looked like they would keep going up.
Meanwhile, the overall Chinese economy had actually been slowing down, and, despite its size, was in fact relatively weak in terms of growth. Debt skyrocketed, and investors awoke to the fact that their nation’s economy was not an effective prop for their nation’s markets. This sudden loss in confidence led to a sharp drop in their stock market. This happened in June, and since then, both the Chinese market and the Chinese economy have been on shaky ground.
Greece: For years now, Greece has struggled to pay down its massive debt, frequently turning to its European neighbors for help. The European Union (EU) has responded with bailouts, but this generosity comes at a cost: Greece has been forced to impose severe austerity measures on itself, mainly in the form of budget cuts and tax increases, in order to bring its debt under control. That has made life very difficult for Greece’s citizens, leaving thousands without jobs and no access to healthcare.
In June, Alex Tsipras, Greece’s then-prime minister, rejected the idea of another bailout if it meant more austerity. A referendum was held in early July, asking Greek citizens whether to accept more austerity measures or not. Tsipras advocated the “Not” option, and over 60% of the country agreed with him.1 Tsipras, it seemed, had stared the EU in the eye and refused to blink.
Barely a week later, he blinked. On July 13, Greece announced it had reached an agreement with its creditors: another bailout and more austerity. Meanwhile, the Greek economy continued to plunge even deeper into recession.
Oil: You have seen it at the pump: oil is cheaper than it has been for a long time. In fact, as of this writing, oil is near its lowest point in twelve years. That is a good thing for consumers! Nevertheless, it is a bad thing for the energy industry, and for countries whose economies depend on selling oil. By extension, their misfortunes can negatively impact global markets.
The reason oil prices have fallen goes back to your Economics 101 class: supply and demand. To put it simply, there is just too much supply and not enough demand. North America, West Africa, Russia, and the Middle East all produce a tremendous amount of oil. (In addition, with the recent lifting of economic sanctions, Iran is poised to start exporting its own oil, thereby increasing supply.) At the same time, many countries that would normally buy oil are experiencing their own hardships, meaning they have less money to buy it. Moreover, as we learned in Economics 101, when the supply of something is greater than the demand, prices fall.
Geopolitics also plays a role. For example, take Saudi Arabia, a big player in the oil game. Saudi Arabia has refused to cut oil production despite the fact that the world’s supply far outpaces the demand for it. Why? Some analysts think it is because if oil prices were to rise, it would only benefit Saudi Arabia’s main competitors, who all need higher prices to turn a profit. Saudi Arabia, on the other hand, can survive on lower oil prices because of their massive cash reserves, and because extracting oil is far less costly for them. This means that lower oil prices harm their competitors while leaving them unscathed, allowing them to dominate more of the market.
The Federal Reserve: On December 16, the Federal Reserve raised interest rates from 0-0.25% to 0.25-0.5%. Doesn’t sound like a big deal, does it? However, it ends a torturous financial drama that has plagued analysts for years: when, exactly, will the Fed raise rates?
The reason the Fed kept rates low in the first place was to stimulate the post-recession economy. Low rates meant more people could buy homes. It meant more businesses could borrow money, and by extension, add more jobs. As the economy has slowly improved, it became apparent the Fed would raise rates eventually. On December 16, they finally did—the first of several expected raises in 2016.
Why are we recapping all these events? Because they, too, illustrate an important point: we all see things differently. Take the Federal Reserve, for example. For years, experts have been divided as to when the Fed would raise rates, or even if they should. Some argued that it was too soon, that the economy was still too weak. Others argued that the government was playing too big of a role in the economy already, or that the Fed’s actions were slowing growth.
Greece demonstrates the same principle. Should Greece continue accepting bailouts if it meant more austerity? Should Europe keep extending bailouts in the first place? What is helping, what is hurting? Oil, too, is the center of much debate. Should the US export its oil abroad? Should it do more to embrace alternative energy? You could ask a dozen different people and get many different answers.
Now, to the overall point:
How you look at a dress. Which boxer you root for. How you feel about gun control. In addition, most importantly, how you react to the markets. On each of these topics, we all see things differently. Furthermore, how we see, what we think, and how we feel says as much about us as anything else. It says what we value. What we prioritize. What we fear. How our minds work. In some cases, it even reveals our biases.
Why is this important? Because when it comes to investing, it is critical that we understand what we think and why. It is important to acknowledge that there may not be one right answer; that ours is not the only point of view; that the same data can yield different interpretations. It is critical that we identify our own biases and preconceived notions, our emotional tendencies, our blind spots. “Nosce te ipsum,” the Ancient Greeks used to say. “Know thyself.”
Failure to do so can lead investors into certain “behavioral traps” that wreak havoc on their financial goals. The “anchoring trap,” for instance. This is when investors rely too much on a first impression or preconceived notion. Example: if your first impression is that a certain investment is a good one, you may turn a blind eye to any evidence to the contrary.
A similar trap is the “confirmation trap.” Also known as confirmation bias, this is “the tendency to search for, interpret, favor, and recall information in a way that confirms one’s beliefs, while giving disproportionately less consideration to alternative possibilities.” In investing, people fall into the confirmation trap when they ignore advice or data that does not correspond to what they already believe…even if that advice is sound. As you can imagine, it is very easy for those in the confirmation trap to lose money.
Emotional traps are another big danger to investors. Just as we rely on emotion to choose which boxer to root for, it is also easy to use emotion to make investment decisions. Fear and greed are two particularly strong emotions. Fear can make us sell too early; greed can make us buy too soon.
Here is the takeaway. The fact that we all see the world differently is why having a financial advisor is so important. It puts someone in your corner to help you make educated, informed decisions. It helps you find and follow the right financial strategy for you, while also remaining flexible in response to market conditions. That is why at our promise to you is that we will be constantly on the lookout, analyzing not only what happens in the markets, but our own responses as well. It is impossible to know what the future holds, but one thing we can say is that 2016 will see its share of debates and arguments, quandaries and conundrums. Our job is not only to help you understand what is going on. It is to help you determine the best way to react—the “best way” being the one most in line with your long-term goals and needs. It’s to help you know yourself: your desires, your fears, your means, and your methods.
So as the world turns and you turn with it, always take a moment to ask yourself, “Why do I think the way that I do? Why do I feel the way that I do? Is it justified? Is it rational? Is it in line with what I truly care about? Does it fit with what I truly want?” And always remember that you don’t have to answer those questions by yourself. We are here to help.
We all see the world differently … but in the end, it is the same world we all must share. So to everyone everywhere (but most especially to you), may 2016 bring peace and prosperity. Thanks again for being such a valued client. Please let us know if there is ever anything, we can do for you.
On behalf of all of us here at Minich MacGregor Wealth Management, have a happy New Year!
1 Suzanne Daley, “Greeks Reject Bailout Terms in Rebuff to European Leaders,” The New York Times, July 5, 2015. http://www.nytimes.com/2015/07/06/world/europe/greek-referendum-debt-crisis-vote.html